Digital Taxation

In 1999, the government constituted a High-Powered Committee to examine the position of e-commerce transactions within the framework of existing taxation rules and to recommend requisite changes. The Committee in its Report suggested that the Central Board of Direct Taxes (CBDT) take a clear position with respect to characterization of payments for each category of e-commerce transactions, introduce measures for efficient exchange of information with other countries and practice mutual assistance in recovery of tax dues in Double Tax Evasion (DTA) agreements.

The CBDT constituted a Committee on Taxation of E-Commerce in 2016 to provide a view on issues related to taxation of e-commerce. In its report ‘Proposal for Equalisation Levy on Specified Transactions’, the Committee recommended imposition of equalization levy under specified circumstances and outlined certain exemptions.

Consequently, Chapter VIII titled ‘Equalization Levy’ was inserted in the Finance Act, 2016 to provide for an equalization levy of 6% on payment received by a non-resident, not having permanent establishment in India for providing specified digital services.

The Central Goods and Services Tax (CGST), 2017 required e-commerce operators to compulsorily register under Section 24(x) of the Act. And for e-commerce operators to collect Tax at Source.

The Finance Act, 2020 inserted a new section, Section 165A to the Finance Act, 2016 to expand the scope of the Equalization Levy by including a 2% levy on non-resident e-commerce operators. However, this levy does not apply if a digital services company does not meet or exceed the revenue threshold of Rs. 2 crores in the previous year.

The Finance Act, 2021 inserted a proviso to section 163 of Finance Act, 2016 to clarify that consideration in the nature of royalty and fees for technical services (FTS), which is taxable under the Income Tax Act read with Double Tax Avoidance Agreements, will not be subject to the equalisation levy.

In March, 2021, the Supreme Court decision in Engineering Analysis Centre of Excellence v The Commission of Income Tax & Anr held that payments made by Indian companies to non-resident software manufacturers for the resale or use of computer software, could not be characterised as ‘royalty’ and thus, not liable to taxation at source under Section 195 of the Income-tax Act 1961 (Act).

In October 2021, India joined 135 other countries in adopting the OECD/G20 Inclusive Framework tax deal under which India agreed to phase out the 2% equalisation levy after the particular provision comes into effect.

Under the Finance Act, 2023, certain amendments were made to the IGST Act, 2017, to expand the scope of online information database access and retrieval (OIDAR) services as well as ‘non-taxable online recipient’, effectively ending GST exemption to certain overseas OIDAR providers. The Act also introduced penalty on marketplace operators facilitating the supply of goods and services of Indian vendors that are not GST registered.